Fitch: UK Banks Reduce MMF Usage as Liquidity Buffers Peak

UK banks’ use of funding from US prime money market funds (MMF) has continued to decline in early 2013, consistent with their on-going efforts to reduce reliance on wholesale funding, Fitch Ratings reports. Overall, short-term wholesale funding has now most likely reached minimum levels.

The credit ratings agency’s (CRA) report, entitled‘US Money Fund Exposure and European Banks: Decline Amid Eurozone Concerns’
, shows that US MMF exposures to UK banks fell to 4.3% of assets under management at end-March, a 16% decline over the last nine months and a new low over Fitch’s period of study – which dates back to end-2006. However, the CRA does not expect MMF flows to UK banks to dip significantly below this level as the banks need to maintain some access to this form of short-term funding as part of their strategy to diversify funding sources.

Fitch adds that the reliance of Royal Bank of Scotland (RBS) and Lloyds, the two banks most affected by the crisis, on wholesale debt markets has reduced due to their deleveraging, liquidity accumulation and build-up of customer deposits. Overreliance on short-term debt is no longer a negative rating driver for these UK banks. Short-term wholesale funds, including some US MMF flows, was covered 3.7x by the liquidity portfolio at RBS and 3.8x at Lloyds at end-Q113.

The banks’ liquidity portfolios are at, or approaching, peak levels and Fitch does not expect them to reduce significantly in the short-to medium-term because loan demand is still muted in the UK. Liquid assets could be used to buy back surplus – and more expensive – wholesale funding. A reduction in liquidity is unlikely to be a negative rating driver as their buffers remain among the highest in Europe.

Since July, the funding for lending scheme (FLS) has provided an additional funding source. While primary usage of this scheme has not been as high as the government expected, a secondary impact has been to reduce funding costs across the board. With less need for liquidity and still muted loan growth, deposit rates fell to their lowest levels since the crisis. The extension of the scheme last month to January 2015 is likely to continue to support low funding costs.

7 views

Related reading

The US money market fund reforms came into effect in 2016 and are already dramatically shaping US fund industry with investors flooding out of prime funds and into government securities. While the reforms are similar, they are not the same. GTNews interviews Yeng Bulter, global head of the cash business at State Street Global Advisors on the differences.

Far and away, the largest financial market on the planet is the foreign exchange currencies market, where on average individuals and organisations trade more than $5 trillion daily. In the FX world, the ability to master the market isn't considered a luxury for treasury officers–it's a necessity.

Treasurers are more interested in cross-border payments and automation than real-time payments, as they are consistently asked to do more with less, argues Rick Burke, head of corporate payments at TD Bank in an exclusive interview.